World Economic Forum on East Asia

Responding to New Uncertainties

Kuala Lumpur, Malaysia 15-16 June 2008

Report
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necessarily reflect those of the World Economic Forum.

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Contents

Page 3
Preface

Page 4
Summary: Responding to New Uncertainties

Page 8
Asian Leadership

Page 12
Global Risks

Page 16
Sustainable Growth

Page 20
Competitiveness

Page 24
Acknowledgements

1 | World Economic Forum on East Asia

2 | World Economic Forum on East Asia
Preface
“Responding to New Uncertainties” was the theme of
the 17th World Economic Forum on East Asia, which
was held in Kuala Lumpur. As such, 300 leaders from
over 25 different countries examined and discussed
the challenges and priorities that will ultimately shape
the region’s future agenda.
At the last World Economic Forum on East Asia,
confidence in the resilience of Asia’s economies was
marked by positive economic growth forecasts,
expanding intra-regional trade, rising investments and
staggering levels of US currency reserves. In this
context, leaders from Asia expressed their readiness
to enlarge their leadership role in global and regional
affairs as the centre of power shifts to Asia’s capitals
and corporate boardrooms.
Only one year later, the prospect of a US recession,
soaring food and fuel prices, and a downturn in global
demand have led to concern about Asia’s ability to
decouple from the US sub-prime mortgage crisis,
which is expected to lead to worldwide losses close
to US$ 945 billion. At the same time, the urgency to
resolve the specific consequences of climate change,
renewed tensions on the Korean Peninsula and
inflationary pressures are challenging the premise that
Asia’s healthy domestic consumption alone can
ensure continued growth and stave off the negative
externalities of a global economic slowdown. Although
ASEAN now has an economic blueprint and charter,
Japan holds the G8 presidency and the economic
influence of China and India continues to rise, the
need for a common agenda in East Asia to address
the key regional and global challenges is unequivocally
pressing.
For these reasons, we hope you find the report of this
year’s proceedings to be an insightful and timely guide
to how the region’s leaders can respond to these new
uncertainties in the short term, but also which
collective actions and innovative approaches by
governments, businesses and key regional institutions
will be critical for dealing with these global and
regional challenges.
The World Economic Forum would like to thank the
Co-Chairs of the meeting: Peter Brabeck-Letmathe,
Chairman of the Board, Nestlé, Switzerland; Member
of the Foundation Board of the World Economic
Forum; Jamshyd N. Godrej, Chairman and Managing
Director, Godrej & Boyce, India; Takao Kusakari,
Chairman, Nippon Yusen Kabushiki Kaisha (NYK Line),
Japan; Lord Levene, Chairman, Lloyd's, United
Kingdom; and Ralph R. Peterson, Chairman and Chief
Executive Officer, CH2M HILL Companies, USA.
W. Lee Howell Sushant Palakurthi Rao
Senior Director, Head of Programming Director, Head of Asia
Senior Adviser, Asia
3 | World Economic Forum on East Asia
Summary: Responding to New Uncertainties
“We have faced serious challenges
before, but rarely in such a potent
combination.”
Abdullah Ahmad Badawi, Prime Minister of Malaysia
At the 17th World Economic Forum on East Asia,
more than 300 business, government and civil society
leaders from 25 countries arrived knowing that the
region is facing new uncertainties. While it remains
clear that the geopolitical and economic power
equation is shifting its direction, rising food and fuel
prices are raising the spectres of inflation and
protectionism and, worst of all, the possibility that
many Asians – who in recent years have scrambled
out of poverty – may again be forced back down. This
could lead to social and political instability in several
countries in the region.
Indeed, these may be the best of times and the worst
of times for East Asia. At the Welcome Reception for
participants, Malaysian Prime Minister Abdullah
Ahmad Badawi hailed the region as full of “immense
promise and dynamism” with people who “brim with
entrepreneurial spirit and competitive drive”. But, he
warned, “the economic well-being of the region and,
indeed, the world, is coming under increasing and
serious threat. The threat is emanating from three
primary sources: rising food prices, spiralling costs of
4 | World Economic Forum on East Asia
“Until very recently, East Asia was a
follower of the global agenda but, for
the first time, it is now a leader. The
world looks to the region to get it out of
the current financial crises.”
Peter Brabeck-Letmathe, Chairman of the Board, Nestlé,
Switzerland; Member of the Foundation Board of the World
Economic Forum; Co-Chair of the World Economic Forum on
East Asia
energy and the very real prospect of global economic
recession. We have faced serious challenges before,
but rarely in such potent combination.”
The World Economic Forum on East Asia offered an
excellent platform to discuss these difficult issues. As
Ahn Ho-Young, Deputy Minister for Trade of the
Republic of Korea, put it, “the World Economic Forum
is about turning challenges into opportunities.”
That is precisely what participants aimed to do in
Kuala Lumpur. It was evident from the interactive
discussions that East Asia’s leaders are responding to
the new uncertainties by taking a long-term view, not
panicking. A survey by the World Economic Forum
indicated that the business sector remains resolutely
focused on the big picture and how Asia can
contribute to securing and sustaining global growth,
peace and stability. An overwhelming 81% chose “Things are moving so fast that
“addressing growing global concern over government cannot respond.”
environmental challenges such as climate change and
water” as their top priority among issues with potential
impact on Asia. Other choices included “preventing Lam Di Don, Chief Executive Officer and Co-Founder,
political and economic instability linked to rising food VinaCapital Group, Vietnam
and energy prices” and “managing the social,
environmental and infrastructural implications of rapid
urbanization”.

East Asia is at a crossroads in its role in the global connect the people and government so that the
economy. “Until very recently, East Asia was a follower complaints of ordinary people are heard,” said Huang
of the global agenda but, for the first time, it is now a Xingguo, Mayor of Tianjin, People’s Republic of China.
leader,” explained Peter Brabeck-Letmathe, Chairman “The best solution is transparency and openness.”
of the Board, Nestlé, Switzerland; Member of the
Foundation Board of the World Economic Forum; and Concluded Jamshyd N. Godrej, Chairman and
Co-Chair of the World Economic Forum on East Asia. Managing Director, Godrej & Boyce, India; Co-Chair of
“The world looks to this region to get it out of the the World Economic Forum on East Asia: “It’s a
current financial crises.” While there is clearly some problem of governance, not with the type of
ambivalence about Asia’s readiness to take up the government you have.”
mantle, Asian leaders must step up to the challenge.
The World Economic Forum on East Asia was
The business sector must take the lead – especially in organized under four sub-themes: Asian Leadership,
addressing pressing problems such as rising food and Global Risks, Sustainable Growth and
energy prices that are generating discontent among Competitiveness.
people. “We are closer to the people, while
government tends to lead and tell people what to do,”
said Lam Di Don, Chief Executive Officer and Co-
Founder, VinaCapital Group, Vietnam. The key to
responding to uncertainties is to provide effective
leadership in both the public and private sectors. “We
should always establish a very good mechanism to

5 | World Economic Forum on East Asia

“This meeting is a good opportunity to
study what changes are happening in
the region and how we can collaborate
to affect its politics and economics.”
Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha
(NYK Line), Japan; Co-Chair of the World Economic Forum on
East Asia
Asian Leadership
Asian economic dynamism amid the faltering global
economy has underscored how the centre of gravity
of the global economy is shifting.
• While Asia’s voice and influence on the world stage
are increasing, the region remains under-
represented in international institutions
• But the readiness of Asia to assume the mantle of
global leadership is in question, given what some
perceive to be weak leadership at the national and
regional levels
• A key question is whether Asia has the capacity to
address the challenges posed by rising energy and
food prices, as well as the issue of environmental
degradation
6 | World Economic Forum on East Asia
“The mood today is more concerned
about food prices than protecting
farmers.”
Jamshyd N. Godrej, Chairman and Managing Director, Godrej &
Boyce, India; Co-Chair of the World Economic Forum on East
Asia
Global Risks
Asia is facing three major global risks – inflation
resulting from soaring food and fuel prices, the rise of
protectionism, and questions about security in the
region.
• The rise of inflation spurred by increases in fuel and
food prices could undo the economic progress that
the region has made since the financial crisis more
than a decade ago
• Solving the food and energy problems will require
concerted action among countries in the region and
cooperation between the region and the rest of the
world
• Given the rising spectre of protectionism, the
international community must refocus attention on
the Doha Round of global trade talks and the need
for the negotiations to be concluded quickly and
successfully
• East Asia must reflect on how the security
architecture of the region should develop. The
ASEAN Regional Forum could play an expanded
role as the main pan-Asian forum for discussions on
security issues with all the global players, including
the US, Europe and Russia
F
M
 “I wish to examine together with you
comprehensive and integrated
responses to the issues of climate
change, development, water, and food,
which are all mutually interlinked.”
Yasuo Fukuda, Prime Minister of Japan
Sustainable Growth
Concerns over food and fuel prices seemed to
overshadow long-term questions about sustainable
growth in Asia. Still, participants stressed the
importance of addressing the challenges of climate
change and water scarcity.
• Efforts to address the fuel and food crises must
include both short-term measures and more long-
term remedies to ensure sustainable growth
• As the continent gets wealthier, Asia must resolutely
focus on the problem of the gradual depletion of its
resources, including water
• To effectively address the challenge of sustainable
management of resources to secure growth, the
region must find collaborative solutions, including
public-private partnerships
• Companies must embrace their social
responsibilities and the importance of engaging in
society on major global issues. Corporate
engagement in society is most effective when
aligned with the enterprise’s business proposition
From left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime
Minister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales,
“Multilateralism is still the priority. Asian
countries feel that it is crucial to
complete the Doha negotiations. We
need to gain certainty.”
Mari Pangestu, Minister of Trade of Indonesia
Competitiveness
Fast-growing Asia may be a “cushion” for the faltering
global economy, but it has not yet become the fine-
tuned engine of growth that many may already
perceive it to be.
• The current global economic storms will be a major
test for Asia’s economies
• The key question is whether Asian countries can
continue to improve their competitiveness
• Collaboration among governments and enterprises,
between the public and private sectors, and among
and within companies, is a key to boosting
competitiveness. Collaboration in R&D increases
advantages for Asian companies
• The main challenge for government and business is
to improve governance standards and to constantly
retool and reform
7 | World Economic Forum on East Asia
Asian Leadership
“If you’re travelling in Europe and the
US, there’s a feeling of doom and
gloom. Here, you step off the plane and
it’s the opposite. This is the right place
to be at the moment.”
Lord Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair of
the World Economic Forum on East Asia
Asia’s dynamism is cushioning the global economy
from a sharp slowdown brought about by the US sub-
prime crisis and Europe’s anaemic growth. Led by
China and India, the region is picking up the slack in
global demand and staving off recession as it faces
strong headwinds of falling US import demand and
rising food and fuel prices.
Taking particular note of Asia’s robustness, Lord
Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair
of the World Economic Forum on East Asia, told
participants that the centre of economic gravity has
shifted dramatically. “If you’re travelling in Europe and
the US, there’s a feeling of doom and gloom. Here,
you step off the plane and it’s the opposite. This is the
right place to be at the moment,” he said. In contrast,
a faltering US economy and the much-criticized US
military attack on Iraq have greatly discredited the
country’s image, power and self-confidence. While the
US is widely expected to remain a dominant player in
world affairs, its recent problems and hubris are
increasingly seen to have hastened the shift to a new
post-US world.
8 | World Economic Forum on East Asia
“The question is: Does Asia have the
institutions, the leadership and the
inclusiveness to lead in the long run?”
Azman Mokhtar, Managing Director, Khazanah Nasional,
Malaysia
That shift was most sensationally signalled when Asian
and Middle Eastern sovereign wealth funds bailed out
Wall Street’s finest after they suffered multibillion dollar
write-offs from derivatives trading and sub-prime and
real estate lending. The humiliating reversal of fortunes
came just over a decade after the 1997-1998 Asian
finance crisis unleashed a series of reforms across the
region aimed at improving corporate and
macroeconomic governance.
In keeping with its growing economic clout (see Figure
1), Asia has also been given a louder voice and
greater responsibility on the world stage. International
institutions of global governance such as the United
Nations, the World Bank and the International
Monetary Fund (IMF) have begun to place Asians at
the apex of their leadership. Today, a former South
Korean foreign minister is the Secretary-General of the
UN; a former Hong Kong civil servant runs the World
Health Organization; a Japanese heads the United
Nations Educational, Scientific and Cultural
Organization; and a Chinese academic is the World
Bank’s chief economist. In addition, three Asian
countries – China, India and South Korea – have been
invited to the G8 Summit on climate change in “The global economic slowdown may
Hokkaido, Japan. inspire protectionism and the imposition
Figure 1: East Asia's Share of the World Economy of regulations that would impede rather
East Asia's increasing share of the world economy is not limited to China's forecast growth
than support growth.”
50
Forecast

G7 (x-Japan)
Marcus Agius, Chairman, Barclays, United Kingdom
40
Percentage of world GDP (PPP)

30

20
Japan

10 China a major regulatory failing in the US, the “IMF is

0
1980 1985
Source: International Monetary Fund, World Economic Outlook Database (April 2008)
But more needs to be done to convince many Asians
that the region’s representation within global governing
bodies is commensurate with its economic prowess.
Consider the UN Security Council: its only permanent
Asian representative is China, even though Asia claims
60% of the world’s population and generates one-third
Rest of East Asia
keeping quiet, doing nothing,” he charged. To be sure,
1990 1995 2000 2005 2010F soaring commodity prices (see Figure 2), food and fuel
in particular – rice, the staple food for 2.5 billion
Asians, has more than tripled in price in Thailand since
January, while diesel has risen over 26% in Vietnam –
are reinforcing the perception that present global
governance is inadequate. Marcus Agius, Chairman,
Barclays, United Kingdom, described the international
institutions as “pretty out of date”.
Figure 2: Commodity Prices

of global GDP. Europe, with just 11% of the global Prices for iron ore and rice rising as dramatically as oil

population, boasts three members. Then there is the 500

Oil**
rule that a European should occupy the top seat at
Index of real prices* (100=January 2002)

400
the IMF, while the chief position at the World Bank is
reserved for an American. 300
Iron
ore

Soybeans
200
No wonder Yashwant Sinha, Member of Parliament;
Rice
Minister of External Affairs (2002-2004) and Minister of 100

Finance of India (1998-2002), was sceptical. He

0
maintained that, had the sub-prime crisis originated in Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Asia or Latin America, the IMF would have dispatched * Priced in US$; US-inflation adjusted prices with April 2008 as base month
** West Texas Intermediate Crude

“huge teams” there to order reforms. Yet in the face of Source: IMF; US Bureau of Labor Statistics; PwC analysis

9 | World Economic Forum on East Asia

“Research is of paramount importance
when it comes to food and agriculture
solutions.”
Musa Hitam, Chairman, Sime Darby, Malaysia
Meanwhile, as Yasuchika Hasegawa, President,
Takeda Pharmaceutical Company, Japan, argued, it is
unfair to blame high-consuming developing nations in
Asia for high energy prices and place more of the
burden on them to deal with the problem of climate
change. Asking developing economies such as China
to shoulder more of the responsibility for reducing
carbon emissions is unfair when developed countries
such as Japan and Germany produce more than three
times per head the CO2 levels, Hasegawa reckoned.
Is Asia ready to assume the global mantle of
leadership? Can it? There are those who have their
doubts. “The question is: Does Asia have the
institutions, the leadership and the inclusiveness to
lead in the long run?” Azman Mokhtar, Managing
Director, Khazanah Nasional, Malaysia, asked. He is
not sanguine. “We don’t see it,” Azman said. “There is
a lack of leadership in the national and regional levels,
much less at the global level.”
Citing the track record of ASEAN, the region’s most
established multilateral grouping, Musa Hitam,
Chairman, Sime Darby, Malaysia, a former Malaysian
10 | World Economic Forum on East Asia
“In Japan, the government has been
reforming for the last seven years, with
or without a crisis, but it is also key to
look at reforms both on a short and
long term basis.”
Yoriko Kawaguchi, Member of the House of Councillors,
Japan; Minister for Foreign Affairs of Japan (2002-2004).
deputy prime minister, said he, too, is not hopeful.
ASEAN, for instance, has the capacity to tackle the
food inflation problems in a collective and concerted
manner but has not done so, despite much talk over
the years of collaboration in agriculture, he pointed
out. Asian countries have to stop being insular if the
region is ever to forge a shared agenda for tackling
global uncertainties including energy, water and
environmental constraints, participants agreed.
Badawi issued a timely call for national and regional
action: “Many of us have instituted measures we
consider in the best interests of our economies and
our people. But it is too evident that these measures
will only have limited impact as food and fuel prices
continue to soar while the global economy is on the
verge of a recession.” For now, Asia’s insatiable
appetite for consumer goods and the abundance of
investment opportunities will ensure that the region
remains the locomotive for the world economy.
Governments’ Role in Fuel and Food Hikes
Business leaders at the World Economic Forum on East
Asia highlighted the role of government in food price
increases, warning of mounting unrest and
protectionism if urgent action is not taken.
Peter Brabeck-Letmathe, Chairman of the Board,
Nestlé, Switzerland; Member of the Foundation Board
of the World Economic Forum; Co-Chair of the World
Economic Forum on East Asia, attributed two-thirds of
the food price rises to government decisions. He said:
“About 10% of food price increase can be due to the
increase in fuel, 10% from changes in lifestyle … about
one-third of the price increase, we will give it to the
decision to use food for biofuels … and about one-third
to political decisions to stop exports … and 10% from
speculators.”
Government subsidies, which have long distorted
agricultural prices, keep food issues political.
Other factors driving up food prices include inadequate
investments in infrastructure, particularly in developing
countries like Indonesia, resulting in higher logistical
costs, and in research and development. Musa Hitam,
Chairman, Sime Darby, Malaysia, called on ASEAN to
act collectively in search of long-term solutions rather
than knee-jerk reactions.
Michael J. Roux, Chairman, Roux International,
Australia, said the issue of food price increase should
be treated separately from the fuel crisis, noting that
factors supporting the oil price increase are less
sustainable. He said he believes that the oil price would
collapse if the US goes into a recession.
Some participants felt reform is needed in structuring
incentives to influence energy consumption behaviour,
for example, lifting fuel subsidies that have led to price
distortions.
11 | World Economic Forum on East Asia
Global Risks
“The food crisis is an affordability – not
an availability – problem.”
Rajat M. Nag, Managing Director-General, Asian Development
Bank, Manila
Words of one Asian minister at last year’s World
Economic Forum on East Asia proved to be prophetic
when he warned, “It’s precisely because everyone’s
feeling good that we know something is coming.” The
Asian landscape then was brimming with optimism.
Interest rates and inflation were low, companies were
enjoying booming profits and governments were
reporting healthy tax takings. Fast forward a year –
and that upbeat sentiment has given way to deep
anxiety.
With soaring food and fuel prices, regional equity
markets rapped by the unwinding sub-prime crisis
and threat of a global economic downturn, the mood
at this year’s World Economic Forum on East Asia
was predictably sombre. Inflation was understandably
foremost on the minds of participants. Rajat M. Nag,
Managing Director-General, Asian Development Bank,
Manila, called it an issue of grave concern. He
predicted inflation for the region would surpass the
ADB’s April forecast of 5.1% for the year.
12 | World Economic Forum on East Asia
“We are in the same boat; we share the
same destiny. We should not fall into
the trap of protectionism but should
help each other.”
Yoshimi Watanabe, Minister of Financial Services and
Administrative Reform of Japan
Nag also warned that Asia’s “good growth story” is
under threat if swift government response is not
forthcoming in the form of tightened monetary and
fiscal policies. However, noted one panellist, raising
interest rates may not arrest rising prices, especially if
inflation is not generalized and limited to food and
energy.
Leaving aside the debate on monetary policy, there
was agreement that governments should intervene
quickly by giving targeted support to the poor –
hardest hit by rising prices (see Figure 1). According to
some estimates, about 100 million people have
descended into poverty worldwide in the wake of this
crisis. Low and middle income groups are feeling the
strain.
 “Given the deep integration of the
Figure 1: Rising Food Prices, Unequal Impacts
global economy, the slowdown is
(food weighting within consumer price index, percent)
80 having a great impact on our
Bangladesh
70
Nigeria
economies. We in Asia should work
60

50 Afganistan
together to find solutions.”
40
Kenya Russia Vu Van Ninh, Minister of Finance of Vietnam
30

20

10 India China Brazil

UK US
0
0 1 2 3 4 5 6 7 8
Per capita income (in log)
back on old tools” such as authoritarian measures to
squelch protests.
Note: Poor people tend to spend relatively more of their income on food, and therefore suffer more when food prices go up.
Source: International Monetary Fund

Asian governments, some participants pointed out,

Participants concurred that solving the food problem need to rethink existing policies in view of current
will require concerted action within Asia and between realities – notably fuel subsidies, which have led to
the region and rest of the world. Food surplus nations price distortions and unbridled energy consumption.
need to put collective interests above national ones by However, it is a task that requires tremendous political
releasing their stockpiles to those facing shortages. resolve as governments face the conundrum of
International aid is also urgently required to balancing the total or gradual removal of an
supplement national rescue efforts aimed at easing unsustainable policy that threatens to further stoke
the suffering of those most affected. inflation with the political costs of doing so.

While solutions are being deliberated, simmering In the longer term, reform is needed to address the
tension over the hike in food and fuel prices has deeper issue of the energy crisis – excessive
meanwhile led to mass protests reminiscent of riots in dependence on fossil fuels. One panellist said that it is
the immediate aftermath of the Asian financial crisis. time for Asian governments to seriously consider
Inflation has morphed into a political risk, testing the diversifying their energy mix to include hydro-
mettle of several regimes in the region. “Things are electricity, solar and wind power, fuel derived from
moving so fast that government cannot respond,” biomass and – albeit controversial – even nuclear
warned Lam Di Don, Chief Executive Officer and Co- energy.
Founder, VinaCapital Group, Vietnam. “If government
doesn’t come out with new solutions, they will fall

13 | World Economic Forum on East Asia

 Yasuchika Hasegawa, President, Takeda Pharmaceutical Company, Japan; Lord Levene, Chairman,
Lloyd's, United Kingdom; Co-Chair of the World Economic Forum on East Asia; Rajat M. Nag, Managing
Director-General, Asian Development Bank, Manila; and Ralph R. Peterson, Chairman and Chief Executive
Officer, CH2M HILL Companies, USA; Co-Chair of the World Economic Forum on East Asia
Another looming global risk is the rise of
protectionism. There are worrying signs that politicians
in Europe and the United States are prepared to
introduce policies to shield their domestic industries in
view of the global economic slowdown, observed
several participants. Sharply critical of politicians who
pander to their electorate, meeting Co-Chair Lord
Levene cautioned Western developed economies that
erecting protectionist barriers would backfire. “If you
go to any Wal-Mart store in the US, about 60% to
80% of everything is made in China. If you cut off all
that manufacturing and say you are going to produce
these things domestically, the cost will go up to levels
such that the public – which enjoys a high standard of
living now – will not be able to buy these things
anymore.”
Agreeing on the need to keep free trade alive, Ralph
R. Peterson, Chairman and Chief Executive Officer,
CH2M HILL Companies, USA; Co-Chair of the World
Economic Forum on East Asia, said protectionism is
an enormous risk and its pursuit will be tragic. He
added that a retreat from a liberal trade regime is a
grave danger to the world. Another participant issued
a dire warning: the ingredients are there for a trade
war to break out. “What will we be celebrating in
2019?” he asked. “Are we going to be looking at the
opportunities that this fantastic era of globalization has
brought about or are we going to be reflecting on the
ashes of World War Three?”
The rising threat of protectionism has refocused
attention on the outcome of the Doha Round of global
trade talks. Many participants shared the concern
14 | World Economic Forum on East Asia
that, if no breakthrough is achieved at the negotiations
before the US presidential elections in November, free
trade and other global endeavours will suffer a
setback that will stall progress for years. Lamented
one panellist: “How can we envisage collaborating on
critical issues such as climate change and poverty if
we cannot collaborate on Doha?” In the meantime,
Asian countries are certainly collaborating together,
with intra-Asian trade growing faster than trade
between Asia and the rest of the world (see Figure 2).
Figure 2: Trade within Asia
Exports within developing Asia represent a growing
share of all exports from developing Asia
45%
Intra-Asia exports as a percentage of
all exports from developing Asia*
43
41
39
37
1999 2000 2001 2002 2003 2004 2005 2006
* Excludes Japan
Source: IMF Direction of Trade Statistics
Security in the region was yet another concern vexing
participants. The United States’ heavy involvement in
Iraq and Afghanistan in recent years has raised doubts
over its commitment to East Asia. Coupled with the
rise of China and India, the region faces an emerging
security dilemma that may potentially threaten its
prosperity. What should replace a US-centric security
architecture if it is deemed irrelevant in a multipolar
world order?
The Systemic Financial Risks ahead for Asia

The international credit drought created by the US sub-

prime meltdown has challenged the underlying risk
management models of both central bankers and industry
executives.

While there has not been a decoupling of Asian and US

financial markets as a result of the interconnectedness of
financial systems, the current financial turmoil does not pose
systemic risks to countries in East Asia. This was the
unanimous assessment of panellists in a session on financial
risk, including Shaukat Aziz, Prime Minister of Pakistan,
(2004-2007); Nobuyoshi John Ehara, Partner and
Representative Director, Unison Capital, Japan; Benjamin
Jenkins, Senior Managing Director, Blackstone Group, Hong
Kong SAR; and Zeti Akhtar Aziz, Governor, Bank Negara
Malaysia, Malaysia. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia, Malaysia

They pointed out the need to differentiate between capital
markets and the real economy. While Asian countries have
seen a dent in their equity markets in tandem with the fall in
US stock markets, most Asian economies are still recording
good growth, unlike their Western counterparts.
Summing up the sentiment of most of the panellists, one
participant said: “When we faced the financial crisis 10 years
ago, all analysts and the IMF said we would have a lost
decade. But there was a quick resumption of growth for
most countries in the region. That is due to the flexibility of
Asian economies, which were able to bounce back in a
short space of time. Therefore, in the current environment, if
we strip away the contagion effect from the sub-prime crisis
and look at the economies, I’m optimistic.”
Participants voiced their belief that, a year from now, Asia
will remain the fastest-growing region in the world because
of its resilience in absorbing the shocks from the current
financial crisis, its talented pool of human capital,
competitiveness relative to other parts of the world, and
political stability.
Turning to the issue of inflation, most of the panellists agreed
that it is a threat that must be addressed immediately as the
situation is fermenting social unrest. However, they were
cognizant of the difficulty Asian governments face in
balancing the seemingly conflicting interests of monetary
policy and economic growth.

At a panel discussion on the issue, participants were
confident that US troops are not likely to significantly
reduce their troop presence in Asia. Even in the event
of a diminished US military role in the region, most
were optimistic that closer ties between China and
Taiwan will offset the reduced presence. Cross-strait
relations recently improved when both sides signed a
pact to improve economic and cultural links. Better
relations further north are also helping to lessen
tensions. Beijing and Tokyo have just concluded a
landmark deal to set aside a territorial dispute and
jointly develop natural gas fields in the East China Sea.
Even the US, one panellist noted, is gradually
changing its mindset and has come to realize that
military force itself does not guarantee security in Asia.
He observed that the US is increasingly more
supportive of using regional forums to deal with
security issues (e.g. its recent appointment of a
permanent ambassador to ASEAN). Some
participants suggested that the ASEAN Regional
Forum (ARF) play this prime role. They proposed that
the ARF should be expanded to create a pan-Asian
dialogue and added that the US, Europe and Russia
should not be left out of this expanded forum.

Most panellists favoured having a less formal

multilateral security arrangement over a new regional
military alliance. They noted that ad hoc and less
institutional arrangements have served the region well
and cooperation should continue in this less rigid
format, citing the six-party talks on North Korea and
collaboration among the navies of the US, Australia,
India and Japan during the Asian tsunami crisis as
examples of success.

15 | World Economic Forum on East Asia

Sustainable Growth
“Governments should take the short-
term pressures and challenges and turn
them into opportunities, such as
seeking alternative fuel resources and
increasing efficiency in oil and food
consumption.”
Ahn Ho-Young, Deputy Minister for Trade of the Republic of
Korea
An overwhelming 81% of business leaders responding
to a World Economic Forum survey voted for
“addressing growing global concern over
environmental challenges such as climate change and
water” as the top choice of issues with the greatest
impact on Asia.
Other major concerns included “preventing political
and economic instability linked to rising food and
energy prices” and “managing the social,
environmental and infrastructural implications of rapid
urbanization”.
Notwithstanding, at the World Economic Forum on
East Asia, climate change and water were somewhat
sidelined by the clear and present danger of spiralling
food and fuel prices.
Food, fuel and finance, or the “Three Fs”, as Ahn Ho-
Young, Deputy Minister for Trade of the Republic of
Korea, put it, were hot topics as rising prices have
stoked public anger and sparked demonstrations
16 | World Economic Forum on East Asia
across Asia in recent months. The morning Ahn spoke
at a panel session, the front page of a Korean
newspaper carried a photograph of more than 5,000
truck drivers striking in South Korea, demanding that
the government increase subsidies for fuel, authorize
higher freight charges and introduce a minimum wage.
Demonstrations were also held in Indonesia, Malaysia,
India, Thailand, Myanmar, Hong Kong and Nepal,
where prices of daily necessities like rice, corn,
soybeans, cooking oil, kerosene and gasoline have
surged. Governments have been forced into quick-fix
actions including reductions in import tariffs on
agriculture products, cash rebates on petrol and diesel
and incentives for farmers to increase productivity.
Fuel subsidies are common in Asia’s developing
countries – they account for 2% of India’s GDP and
30% of Indonesia’s budget. Governments risk
fomenting political unrest if they raise prices or cut
subsidies, as those affected are mainly poor people
who spend the bulk of their earnings on food and
transport. Last year’s mass protest in Myanmar – the
country’s largest in 20 years – and the resulting
military crackdown followed announcements by the
government of hikes in gasoline and diesel prices.
Mari Pangestu, Minister of Trade of Indonesia, said her
government responded to the global shock of rising
food and fuel prices by lowering tariffs related to
agriculture products. It tries not to control fuel prices,
which have increased by 30%, preferring to let
domestic prices adjust as gradually as possible. At the
same time, the government aims to ease the burden
of rising food prices by giving incentives to farmers to
expand production, especially of crops that can be
harvested quickly.
In South Korea, the government introduced a US$ 10
billion programme of short- and long-term solutions to
benefit small enterprises and low-income workers.
“This is a clarion call for us to reduce our dependence
on foreign oil,” said Ahn.
“Water systems are so Balkanized [that]
it’s difficult to get a comprehensive view
of how to use the resources efficiently.”
Ralph R. Peterson, Chairman and Chief Executive Officer,
CH2M HILL Companies, USA; Co-Chair of the World Economic
Forum on East Asia

Inflation aside, the falling US dollar is also adding to
Asia’s economic woes. The faltering currency is
making locally manufactured goods relatively more
expensive in dollar terms and, coupled with the sharp
slowdown in the US economy, is threatening to
undermine Asia’s much-vaunted export power. Day to
day, currency volatility is hampering the ability of
businesses to run their operations and plan strategy.
Exports have held up so far, thanks to gains in Asian
productivity and growing intra-regional trade. Whether
the strengthening of Asian currencies is a long-term
phenomenon remains to be seen.
Asian companies need to find innovative ways to get
around resource constraints and infrastructure
bottlenecks. Solutions could include telecommuting
and the creation of smaller urban centres. Some
participants argued that mounting urbanization would
lead to more pressure for democracy, which Asian
governments may not be able to ignore. Local
governments could become more powerful engines of
change than central governments.
Figure 1: Water Rates Around the World
Water tariffs across Asia are lower than in other developing countries

$1.25

Also straining resources is the growing urbanization of

Asia resulting from rural-urban migration. This has also 1.00
Average water tariff (US$/kl)

widened the gaps in infrastructure and skilled human .75

capital in many of the region’s economies. Participants

.50
debated whether the private or public sector should
take the lead, or whether public-private partnerships .25

should be the main catalysts for change. Explosive

0
growth has outpaced the capacity of institutions to OECD Latin America Middle East East Asia Eastern and South Asia
Caribbean North Africa Pacific Central Asia
supply skills.
Source: World Bank, 2005

17 | World Economic Forum on East Asia

 Klaus Schwab, Founder and Executive Chairman, World Economic Forum; Takao Kusakari, Chairman,
Nippon Yusen Kabushiki Kaisha (NYK Line), Japan; Co-Chair of the World Economic Forum on East Asia;
Lee Bill Byunghoon, Chairman and Chief Executive Officer, Univera, Republic of Korea; and Yoshitaka
Kitao, Representative Director and Chief Executive Officer, SBI Holdings, Japan

Another pressing long-term concern is the gradual
depletion of Asia’s resources, including water. Over-
exploitation, excessively low tariffs (see Figure 1), rapid
urbanization, industrial pollution and climate change
have exacted a heavy toll on this precious resource.
Growing affluence in China and India have also led to
a higher meat diet, which requires 10 times more
water than a vegetarian diet. Co-Chair Brabeck-
Letmathe did not mince words when he repeated this
warning: “We will be running out of water long before
we run out of oil.” He lamented that more of the
world’s GDP has been devoted to the climate change
issue and not enough resources allocated to water.
“One out of every five children is dying every 20
seconds because we haven’t been able to solve the
problem of clean water today,” said Brabeck-
Letmathe.
Meeting Co-Chair Peterson called for more political
and institutional collaboration, saying that the water
systems are “so Balkanized [that] it’s difficult to get a
comprehensive view of how to use the resources
efficiently.” He noted that water is not free and the
sooner market forces are applied to the pricing of
water, the better. A more realistic pricing would
minimize leakage and act as a deterrent to wastage.
Water tariffs across Asia are among the lowest in the
world.
The issue of water, like climate change, is gaining
more awareness as Asian corporations consider their
social responsibilities in championing the cause of
sustainable growth. Many are realizing that regional
and international agendas are increasingly forming
around universal issues, and environment-related
problems such as sustainable resources and health
affect all countries and, consequently, all businesses.
Corporate engagement can take five forms: corporate
governance, corporate philanthropy, corporate social
responsibility (CSR), social entrepreneurship and
corporate global citizenship.
Corporate global citizenship and CSR are distinct but
interlinked. CSR programmes often include incentives
to promote the environment. Companies can
encourage fuel savings, sustainable farming and clean
air with a variety of financing incentives and
technological innovation. Japanese shipping line
Nippon Yusen Kabushiki Kaisha (NYK Line), for
example, has cut its fuel bill by 9% by taking
advantage of sea currents to help its vessels sail.
Corporate global citizenship and CSR activities are
most effective when aligned with a corporation’s own
unique resources. Goodyear Tire Management
Company (Shanghai), for example, conducts free
inspections for cars in China and researches the
potential use of new materials, such as corn, to make
tyres. By becoming more aware of how
interconnected the world and its trading systems have
become, Asian enterprises are slowly but surely
stepping up to their responsibilities of being good
global corporate citizens.

18 | World Economic Forum on East Asia

 “We will be running out of water long before
we run out of oil.”

Peter Brabeck-Letmathe, Chairman of the Board, Nestlé,

Switzerland; Member of the Foundation Board of the World Economic
Forum; Co-Chair of the World Economic Forum on East Asia

Managing Asia’s Most Valuable Resource

Rapid urbanization, industrialization, changing diets and Water should be viewed on a more multidimensional
climate change are aggravating the effects of scale, because it is interconnected with issues like
unsustainable water use in Asia. climate change and other global problems. This would
help overcome constraints developed countries
The first issue is lack of awareness by most countries experience when devoting resources to water
and policy-makers of the urgency and scale of the separately.
impending global water crisis.
Water pricing was a favoured measure among leaders
People expect water to be available and inexpensive, at the World Economic Forum on East Asia in Kuala
but don’t realize that, like oil, it is a scarce commodity. Lumpur. One suggested providing a minimum level to
There is also a need to create greater awareness of the meet “human rights” requirements free of charge, and
use of water for agriculture, which normally uses the pricing upwards to encourage proper usage.
largest proportion of the supply.
Finally, more research is needed to produce hard-hitting
The second issue is fixing the problems in developing facts and figures to convey the severity of the problem.
countries. One-third of the world still does not have
access to clean water despite technological advances
and assistance from developed countries. In fact,
whether run by the public or private sector, water
leakage and pollution continue to plague both
developed and developing countries. While water
supply in most countries is managed mostly by the
public sector, there is no clear consensus as to who
can do a better job in preventing such problems.

19 | World Economic Forum on East Asia

Competitiveness
With the downturn in the US and the resulting
slowdown in the global economy, Asia’s economies,
particularly the fast-growing giants China and India,
have been recognized for providing a “cushion” for the
rest of the world. “In the short run, Asia will take up
the slack,” said Azman Mokhtar, Managing Director,
Khazanah Nasional, the investment holding arm of the
Malaysian government. This is a significant turnaround
from 1997-1998, when a financial crisis hobbled East
Asia and pushed many of the region’s economies into
recession, wiping out significant wealth and pushing
many people back into poverty.
This has certainly heightened the perception that the
global economic centre of gravity is inexorably shifting
to Asia. Days after the meeting in Kuala Lumpur
ended, the news that Hong Kong and Singapore took
the top two positions in the Enabling Trade Index
ranking released by the World Economic Forum
served as further evidence of East Asia’s economic
strength and openness to trade and investment.
But it is important to maintain perspective. While East
Asian growth may be strong and its economies are
certainly in better condition and more resilient than
they were a decade ago when the financial crisis hit,
most of the region’s economies are not as competitive
as they may be perceived. Only Singapore, at number
seven, ranked in the top 10 on the World Economic
Forum’s 2007-2008 Global Competitiveness Index.
Other top East Asian performers included South Korea
(11), Hong Kong SAR (12) and Taiwan, China (14). The
People’s Republic of China, meanwhile, ranked 34th,
while India was 48th. Cambodia came in at 110.
20 | World Economic Forum on East Asia
“Economic globalization and regional
integration will further promote
cooperation among Asian countries and
Asia will be the most dynamic region
and backbone of the world economy.”
Huang Xingguo, Mayor ot Tianjin, People's Republic of China
Indeed, with the storms in the global economy and
high energy and food prices raising uncertainties
about the benefits of globalization, “the question is
whether Asia can maintain its growth momentum
against strong headwinds,” said Børge Brende,
Managing Director, World Economic Forum. Certainly,
there is cause for concern that some Asian economies
are in trouble. “Given the deep integration of the
global economy, the slowdown is having a great
impact on our economies,” Vu Van Ninh, Minister of
Finance of Vietnam, explained. “Vietnam is being
impacted especially by high inflation. We in Asia
should work together to find solutions.”
Implicit in Brende’s observation is a warning that Asian
economies cannot be complacent and must focus on
improving productivity and boosting competitiveness if
they are to become an authentic and sustainable
driver of growth in the world economy and not just a
reliable “cushion”. As Vu pointed out, the way to find
solutions is to collaborate. Reckoned Yoshimi
Watanabe, Minister of Financial Services and
“The international institutions we have
at the moment are woefully inadequate
to meet the global challenges. If we are
providing the bulk of the incremental
growth globally, we Asian nations have
a vested and immediate interest in
making sure that the global institutions
respond to the global crisis as they
should.”
Yashwant Sinha, Member of Parliament; Minister of External
Affairs (2002-2004) and Minister of Finance of India (1998-2002)
Administrative Reform of Japan: “We are in the same
boat; we share the same destiny.”
A paradoxical principle for success in the global
economy is that collaboration can enhance
competitiveness. Faced with the emergence of China
and India, the 10 nations of South-East Asia have
come to understand and accept that they must
collaborate and aim to create a European Union-style
community if they are to remain competitive and
relevant in the global economic landscape. But
creating the political and commercial will to embrace
such an enterprise has been difficult.
In Asian economies, many participants observed,
governments or major family-owned corporations with
vested interests control much of the value. National
interests and protectionist tendencies have limited
collaboration and the forming of partnerships.
Consider the plaintive question of one participant: “Do
we need to replicate everything?” He wondered aloud
whether it makes sense for neighbouring countries to
build airports and seaports so close to each other.
National pride and the drive to preserve one’s turf
have, in many instances, stifled logic and the
understanding that collaboration can make everyone
more competitive and result in win-win solutions.
Politics and competing motives have impeded the
creation of effective public-private partnerships, which
today are regarded as critical to development
success.
But all this is changing in Asia, however gradually.
Governments are starting to collaborate on critical
issues including financial market stability, energy
security and the environment. But the level of
cooperation, despite the ambitions of ASEAN, remains
low. Corporations are also cooperating – enterprises
with suppliers, partner with partner, and even
competitor with competitor. Collaborators must
understand how the other business works. For a
successful venture, it is important to understand the
“psyche” of the organization, and have a shared
vision, aspiration and culture. As in a marriage, both
sides have to work to make the relationship prosper.
There is further cause for optimism on the research
and development front. In the session entitled The
Myths and Realities of the R&D Advantage, panellists
provided insights into how Asia is emerging as a major
hotbed of research and development, which has led
to the rise in innovation – the transformation of ideas
21 | World Economic Forum on East Asia
 Kishore Mahbubani, Dean, Lee Kuan Yew School of Public Policy, Singapore

into commercial value – coming out of the region in Indeed, the globalization of best practices, if
recent years. India and China are increasing their R&D embraced by the region, is likely to be Asia’s trump
spending by over 25% per year (see Figure 1). Moves card – the way in which it finally transforms its
like these are correcting perceptions that Asia’s main governments and companies into flexible and
advantage is its pool of cheap labour. innovative institutions and competitive enterprises
such as Japan’s Toyota. The automotive giant has
proven that collaboration within the group is integral to
Figure 1: Worldwide R&D Spending its success and a sense of community enhances the
R&D spending in China and India is growing rapidly, but from a small base effectiveness and cooperation of employees and
0.4%
suppliers.
North America
Change in R&D intensity, 2005-06 (R&D
spending as a percentage of revenues)

$194.2
0.2
In short, governance in both the private and public
India/China
$2.1 sectors must be improved if Asia is to transcend from
0
Japan
$96.3 “cushion” to fine-tuned “engine” of competitiveness. In
Europe
$132.6
the session on Delivering a Governance Dividend for
-0.2

Rest of World
Asia, Shaukat Aziz, Prime Minister of Pakistan (2004-
$21.4

-0.4
0 5
One year growth in R&D spend, 2005-06
Note: Size of circle represents relative size of R&D spend, 2006. All figures in US$, billions
Source: Booz & Company’s Global Innovation 1000 study
In the discussion, panellists focused on how
collaborative efforts within enterprises and among
companies have yielded significant opportunities for
“research arbitrage” and boosted the productivity of
enterprises in such sectors as pharmaceuticals,
healthcare, manufacturing and IT. In addition, the
shortage of talent – not just skilled managers but for
technical specialists such as engineers and workers
with vocational skills – means that business and
government must work together to enhance the
quality of educational institutions from the primary level
upwards.
2007), provided a template for a new paradigm of
10 15 20
25 30%
governance that emphasizes delivery and substance.
Governments, he stressed, need to retool and reform
at all levels to quickly meet new challenges such as
the food and energy crises. Strong leadership at the
top is essential, with those in authority taking pre-
emptive measures to head off problems, rather than
simply reacting to events. “Things move so fast,”
warned Aziz, who could well have been speaking
about the business sector too. “You have got to apply
new solutions to deal with new challenges that
emerge. To do that, you need proactive government,
strong leadership and a bureaucracy that will support
change. You need a total shift in thinking.”

22 | World Economic Forum on East Asia

Competitiveness in East Asia
The general perception is that Asians are not just
competitive; they are hyper-competitive. But is this
perception representative? The truth draws a more
nuanced picture as the region encompasses a large
range of competitiveness performances, from highly
competitive countries to those among the most
challenged. This provides an extremely heterogeneous
picture with respect to the levels of economic growth
and prosperity achieved in the region.
In The Global Competitiveness Report 2007-2008, nine
Asia Pacific countries are among the top 30 in the index
rankings, led by Singapore, Japan, South Korea and
Hong Kong. The countries in the next tier are among
the largest markets in the region, led by China and
India. A number of smaller economies close the ranking
for the region, with Mongolia, Bangladesh, Cambodia,
Nepal and Timor-Leste all positioned at the very
bottom.
In this sense, can one prioritize the key factors on which
countries in the region should focus to become more
competitive? Innovation and business sophistication is
crucial for the top-tier countries; improving the quality of
human capital and market efficiency provides a basis for
development and growth for the middle ranking
countries; and factors such as improving basic
education, health systems and infrastructure are critical
for the lowest-ranked economies.
The World Economic Forum on East Asia addressed, in
its various sessions, the drivers of economic
development and, more specifically, held a discussion
on identifying best practices in competitiveness. The
session highlighted a need for a solid macroeconomic
architecture including strong and transparent
governance, public-private sector alignment, an efficient
business infrastructure, openness to international trade
and investment, among other factors.
23 | World Economic Forum on East Asia
Acknowledgements

The World Economic Forum on East Asia is held with the support of the Institute of Strategic and International
Studies (ISIS) Malaysia.

The World Economic Forum wishes to recognize the support of the following companies as Partners or
Supporters of the World Economic Forum on East Asia:

Strategic Partners

American International Group (AIG)

Bain & Company
Barclays PLC
Credit Suisse
Forbes
Kudelski Group
Manpower
Marsh & McLennan Companies (MMC)
NBC Universal
Nestlé
SK Group
Unilever
WPP
Zurich Financial Services

Regional Partner

Sicpa Holding

Meeting Supporters

Lloyd’s
Ogilvy Public Relations Worldwide
Sime Darby

24 | World Economic Forum on East Asia

25 | World Economic Forum on East Asia
Contributors

Sushant Palakurthi Rao is Director, Head of Asia, at the World Economic Forum. W. Lee Howell
is Senior Director, Head of Programming, and Senior Adviser, Asia, at the Forum. The World
Economic Forum on East Asia was under their direct responsibility, with Laura de Wolf, Senior
Specialist, Events and Meeting Coordinator; and Fabien Clerc, Community Relations Manager,
Asia.

Samantha Tonkin, Senior Media Manager at the World Economic Forum, worked with Ciara
Browne, Senior Community Manager, Catherine Ong, Alejandro Reyes and Wong Soo How to
produce this report.

The World Economic Forum would like to express its appreciation to the summary writers for
their work at the meeting. Session summaries are available at:
www.weforum.org/eastasia2008/summaries

Editing: Janet Hill, Editor

Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design

Photographs: Azmi Abdul Alim

26 | World Economic Forum on East Asia

The World Economic Forum on East Asia Report is also available in electronic form on the World
Economic Forum website: http://www.weforum.org/summitreports/eastasia2008 (HTML)

The electronic version of this report allows access to a richer level of content from the meeting, including
photographs, session summaries and webcasts of selected sessions.

The report is also available as a PDF:

http://www.weforum.org/pdf/summitreports/eastasia2008.pdf

Other specific information on the World Economic Forum on East Asia, Kuala Lumpur, Malaysia 15-16 June
2008, can be found at the following links:

Meeting News www.weforum.org/eastasia2008

Session Summaries www.weforum.org/eastasia2008/summaries
Photographs www.pbase.com/forumweb/eastasia2008
Programme www.weforum.org/eastasia2008/programme
Interviews www.weforum.org/eastasia2008/regionalupdate
Partners www.weforum.org/eastasia2008/partners
Webcasts www.weforum.org/eastasia2008/webcasts

27 | World Economic Forum on East Asia

The World Economic Forum is an independent
international organization committed to improving
the state of the world by engaging leaders in
partnerships to shape global, regional and
industry agendas.

Incorporated as a foundation in 1971, and based

in Geneva, Switzerland, the World Economic
Forum is impartial and not-for-profit; it is tied to
no political, partisan or national interests.
(www.weforum.org)